TRADING SYSTEMS

SanDisk Long Breakout And ParaSar Buy

08/31/09 09:48:36 AMby Donald W. Pendergast, Jr.The entire technology sector has been extremely strong over the past few months, offering a steady stream of long trading opportunities. Here's a look at another promising long setup in the tech sector.

Security:SNDKPosition:Buy

SanDisk (SNDK) offers a full array of memory/storage products and has been a consistent innovator within its own industry group for some time. Its stock has had its share of thrilling ascents and frightening plunges along the way, but that's not a major surprise to anyone who's been trading tech-related stocks for any length of time. More recent price action in the stock has been very bullish; the stock nearly quadrupled off of its November 2008 lows and remains in a very bullish mode on both a technical and fundamental level. Right now, SNDK is offering a very interesting buy setup that combines the synergy of two powerful technical measures -- a bullish breakout from a triangle/pennant pattern that occurs in conjunction with a mechanical ParaSar buy signal. Let's examine the chart and see if this is a trade setup worth considering (Figure 1).

FIGURE 1: SNDK, DAILY. The technicals suggest that the current breakout/ParaSar buy signal may be worth considering. SNDK also boasts very good relative strength vs. the broad market indexes.

There's a lot here, so let's begin with the basics. First off, SNDK has very good relative strength (based on a 13-week rate of change vs. the Standard & Poor's 500) as compared to the broad market. Second, the stock has exceptionally good long-term money flow, depicted at the bottom of the chart by the Chaikin money flow (CMF) (100) indicator. Next, note how SNDK experienced a bullish breakaway gap (purple square on chart) in mid-July 2009 after which the stock rocketed up toward the $19.00 area; SNDK then retraced nearly 50% of the entire July upthrust but never did fill the open breakaway gap near $15.50-$16.00. Instead, the stock began a modest "incoiling" process, gradually forming a pronounced pennant or triangle pattern. In the process of doing so, the 50-day exponential moving average (EMA) (blue line) also acted as solid support as the stock reversed higher after meeting it. Note that the reversal off of the 50-day EMA was the second successful test of gap support, encouraging a fresh wave of buying that still appears to be in process.

Finally, the recent bullish breakout of the pennant occurred in tandem with a new parabolic stop and reverse (ParaSar) buy signal. Overall, the technicals couldn't be much better than what we see here, although that still doesn't guarantee the success of a long trade entry at this point. However, the probabilities certainly favor the trader choosing to take this particular buy signal at this time. Remember that the ParaSar system is essentially a trend-following method, one that will always ensure that you can get in on any significant trend move that may materialize. It is not particularly well-suited to those who prefer to enter a position close to a significant swing low (high) as the system does tend to miss out on the early part of many significant market moves.

Therefore, it is essential to do a little technical and fundamental filtering (as we've already done) to ensure that you're not entering a ParaSar long signal during a confirmed bear phase in the stock, exchange traded fund (ETF), or commodity in question, nor entering a ParaSar short signal during a confirmed bull phase.

Trade management is simple: being sure to risk no more than 1-2% of your account equity, enter a long SNDK position at the next market open; when filled, immediately place a stop-loss near $16.23, the ParaSar trailing stop (blue dot on chart). Download your data and/or update your chart every evening and then adjust your stop-loss to the new level attained by the ParaSar stop -- on long trades it will move up a little every day the trade remains open (and vice versa for short trades), allowing you to remain in the position without having to fret over where to place your stop for the next session. At some point, the trade will stop out automatically and you'll either chalk up another winner or loser, depending on how the trade plays out.

Traders hoping to obtain a better fill might want to buy half a position at the open, in anticipation of an intraday pullback on a 15- to 30-minute chart that might enable a better fill price on the final half of the position.

ParaSar, while appearing to be too simple to be effective in today's world of intermarket analysis and neural network trading algorithms, is nonetheless a very effective and straightforward means of trading the financial markets. Knowing when to deploy this system remains one of the keys to greater profitability, of course. Hopefully, this article has helped further enlighten your understanding so you'll know just when the best time to deploy this unique system actually is.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.